First Steps for Home Buyers
A home can be one of the most personally and financially rewarding investments you'll ever make. But if you've never bought a home before, the process may seem a little overwhelming. Here are some tips for the first time home buyer.
Know how much you can afford.
You can start by using the Mortgage Calculator available on our website. This will give you a “ball park” idea of how much you can afford before you start shopping. Your next step should be to make an appointment with a Mortgage Broker or the mortgage representative at your bank. The advantage of using a mortgage broker is that they will do the shopping for you. The mortgage broker will conduct a check of your credit file that can be used to apply to many different banks to find you the best rate and terms to fit your circumstances. If you decide to shop around yourself, each bank will conduct their own credit search, which could possibly impact your credit score.
Two important ratios lenders use to determine how much home you can afford are your Gross Debt Service (GDS) ratio and Total Debt Service (TDS) Ratio:
GDS is your proposed monthly mortgage payment, property taxes and heating costs divided by your gross monthly income. Ideally, it should not exceed 32 per cent. TDS is your entire monthly debt load (homeownership costs plus credit card payments, loan payments and other debts) divided by gross monthly income. Ideally, it should not exceed 40 per cent.
What is a pre-approved mortgage? Does it guarantee I'll get the financing I need?
A pre-approved mortgage simply means that your lender has reviewed your earnings, assets and liabilities and that you meet the criteria for their lending purposes. All pre-approvals are not created equal, if the lender has not conducted a credit check, you may still not be approved for financing if your credit history is not satisfactory.
Having a pre-approved mortgage is a great advantage when you're looking for a home. Knowing the price range that you can comfortably afford will help you narrow down your search and ensure you won't be let down by finding that the home of your dreams is not within your reach. It will also put you in a better negotiating position when you make an offer on a home. In addition, the interest rate that's quoted on your pre-approval is usually locked in for 120 days, so you're protected if interest rates rise while you're looking for your perfect first home.
Once you have made an Offer to Purchase, your lender will have to approve the home. They will want to see a copy of the listing information to see what the home was listed for, what type of heating the property has, and if the property meets their criteria for lending. Some properties can prove difficult to finance. For instance, homes on private wells or septic systems may require additional reports to satisfy a lender that the home is a good risk.
Once your lender has approved the home, they will give you a Commitment Letter. This confirms that they will provide the mortgage. All Commitment Letters have conditions attached. Typical conditions are that you remain employed with your current employer, your credit rating remains within their guidelines etc. It is important not to make any major purchases on credit or to change jobs (even for a better one!) until your home sale closes as these changes can effect your credit rating. Another typical condition (usually with a conventional mortgage) is that the home must appraise for the price paid.
What is the advantage of using a real estate professional?
A good real estate professional will help you find the right home, will show you comparable sales to assist you in coming to a decision about what price to offer and will include any conditions necessary to protect your interests in your Offer to Purchase. It's important to choose a real estate salesperson who is familiar with the area where you are searching for a home. You may be spending a lot of time with your salesperson checking out homes, so be sure to choose someone you feel comfortable working with. Signing a Buyer Representation Agreement with a real estate salesperson ensures that your representative will be required to represent your best interests at all times. This is a binding agreement for a given period of time that ensures that the salesperson you are working with can represent you in your purchase and will be compensated for doing so.
If you have any questions about the home buying process, give us a call. We’ll be happy to help you!